Privately held businesses’ financial statements: a mixed methods study on the objectives, and users’ needs and expectations

Despite the criticism around the resource allocation decision-usefulness objective of the financial statements in the literature, not many studies have questioned its validity and applicability. Under the aforementioned objective, the financial statements seek to provide information to investors and lenders for decision making. It has been said however that resource allocation decisions are rarely, if ever, taken by stakeholders in privately held businesses. This study therefore investigates what is the objective of financial statements prepared by such businesses. This study collected both secondary and primary data to answer the research questions. In relation to the former, the study analysed all 179 comment letters submitted by various respondent categories in reply to a discussion paper issued by the International Accounting Standards Board which sought views on the objectives of financial statements. The comment letters were analysed using content analysis and the findings were analysed quantitatively and qualitatively. Primary data for this study was collected through 9 semi-structured interviews with senior representatives of European accounting standard setters.

The findings have shown that the primary users of private entities’ financial statements are current and potential lenders and current external investors, excluding owner-managers, and occasionally including potential external investors. The findings have shown that the primary objective of private entity financial statements is stewardship. The resource-allocation decision-usefulness objective, with its focus on future cash flows, is marginally relevant to lenders in privately held businesses. It has also been argued that the resource-allocation decision-usefulness objective is relevant to prospective investors and lenders when seeking to determine whether and to what extent will they allocate their own financial resources to the entity at a point in time and going forward. The findings have also shown that the financial statements, on their own, cannot be useful for that purpose and that prospective investors and lenders use various other sources of information when making their resource-allocation decisions.

Finally, the study provides recommendations to accounting standard setters on how to address the objective of financial statements of private businesses in their frameworks, based on the findings of this study. Potential areas for future research have also been identified.